subject: How To Calculate Your Funding Requirements [print this page] Procuring capital to support company financial requirements is a tricky task. But no less tough and important as well is to calculate your funding requirements. The capital market is too complex to comprehend easily. Due to different levels of intense complexities, it is often a problem to determine how much you require for financial support. The need for external financing arises due to the gap between the operating budget and present capital resources. If you focus on this calculation, it will be much easier to assess how much you need from external sources.
Determining your corporate funding requirement is a step-wise process that involves lots of calculations and assessment of the companys record of cost and sale. Those steps are described in a brief and simplified way for easy understanding by the readers.
Estimation of both cost and revenue is important. How much sales do you expect your company to generate next year? It is not possible to forecast an exact amount but you can figure out the approximate sum. Consider the last five years sales use the growth chart; you will get an idea of expected sales. When you know your projected income and current financial resources, calculation of funding requirements will become easier. Apply the same average percentage sales method to work out your operating expenses and cost of sold goods or services provided.
Once you have completed the calculation, find out the difference between sales and operating expenses along with the cost of a good sale. This subtraction will give you the pre-tax figure. Find out how much the company needs to pay as taxes. Now it comes to projecting net income that can be calculated by subtracting taxes from the pre-tax income. Make an estimation of the next years current assets. Use the same method, percentage of sales. Current asset refers to inventory and cash receivables as well as cash.
Applying the historical percentage of goods cost, calculate the current liabilities of the coming year. Calculate the difference between the present asset and liabilities. This extract will give you the figure of working capital needed. Point to note is working capital refers to the amount required to run day-to-day business operations. Subtract the companys working capital requirements and capital expenditure from the net income. And you will get the final figure of external funding requirements.
If the sum turns out to be positive, it means you dont need to borrow anything from the external sources, internal funding is enough to meet the capital requirements. However, if the calculated sum is negative, you have no way but to go for external financing.
Also you need to consider capital investment. None of the assumptions are guaranteed so you do need to check out on impact of changes in sales price, volumes and cost price to get the right number.
